Archive - Aug 19, 2010

Philly Fed comes in at -7.7, trouncing expectations of 7.0, and is the lowest number since August 2009, and first contraction since July 2009. Was the number even in the range of bearish expectations? Where is Steve Liesman - the survey respondents need some perking up: "the region’s manufacturing executives expect growth in business over the next six months, but optimism has waned notably in recent months." Those who look at the chart and think they are seeing the ECRI Leading Indicators are forgiven.

This write-up is in response to a question regarding what would happen if both the stock market and the bond market were to blow up at the same time. I’m assuming the only way this happens is via massive bond defaults. Certainly not saying this is necessarily going to happen, but it is worthwhile to think through extreme events. And it’s not a stretch to think that Greece, a Baltic country with a debt-to GDP ratio of around 500%, and many US states are expecting. Defaults, that is. It is worth understanding how people and institutions respond to an unsustainable debt burden on a societal scale, and how to make money on it. The unexpected results of a promiscuous consequence-free debt binge will have extreme consequences for shaken money-makers.

Just Reuters headlines for now: the CBO has reduced its 2010 budget deficit from $1.368 trillion to $1.342 trillion, even as it kicks the can down the road yet again, raising the 2011 budget deficit estimate from $0.966 trillion to $1.066 trillion: in other words a net deficit increase by $44 billion. Good thing nobody even cares about the 2012 number now that Mayan apocalypse predictions are fully priced into a Dow 36,000 number.

As a reminder, today is POMO day #2. The Fed will monetize (but don't call it that or you will get Tim Geither's panties in a bunch) anywhere between $2 and $2.5 billion. And with the implicit 10-20x leverage by the Primary Dealers, the otherwise vapor volume, the "mo[r|m]onic robot" acceleration effect, this meager reliquification amount could be sufficient to push stocks up by about 0.5-1.0%. This will be even easier now that many shorts have leaned into the market post the horrible Initial claims number, and a manufactured short squeeze courtesy of the Fed and State Street is all but guaranteed. In other words, be very cautious shorting today - here there be printers.

• Sarkozy Calls Crisis Meeting to Avert Loss of AAA Rating (London Times, subscription required)
• Spain just says no to austerity - after all the bankrupt country can place Bills at 4% so all is good: Spain Restores €500m of Spending (FT)
• US Banks Receive Basel III Boost (FT)
• Citigroup's Sweetheart Deal Flunks Smell Test (Bloomberg)
• BOJ May Expand Corporate Loan Program to Help Weaken Yen, Sankei Reports (Bloomberg)
• Goldman's 2027 Call Means China Must Get Busy (Bloomberg)
• Double-dip recession talk will be heating up (Post)
• China Says Local Govt Borrowing Risks Manageable (Reuters)
• U.S. Must Tackle Deficit Without Denting Recovery (Reuters)

Markets in a Flash

· The Pound strengthened suddenly this morning when UK data came in better than expected. The EUR/GBP is moving back towards its monthly lows

· The USD/JPY has started trending down towards its lows in the past few hours.

· US equity futures are higher this morning suggesting a continuation in the rise in equity markets from yesterday’s session.

Welcome to the half a century. Treasuries surge. Futures plummet. Can't wait for Rosie's note.... Or Liesman's spin

Continuing claims at 4.478MM on expectations of 4.5MM; previous 4.452MM revised to 4.491MM.

Those receiving Extended Benefits and EUCs increased by over 300k (+49,229 and +260,105) week over week

However, don't panic - the depression may be over... in 2099.

• Asia stocks rise on Applied Materials outlook; Ringgit, Taiwan Dollar gain
• Asian computer shipments signal extended consumer spending slump in US.
• China allows Ringgit to trade vs Yuan in domestic market.
• China may ban copper producers who violate environment rules for two years.
• Clinton to urge global aid for Pakistan to match Haiti response
• SEC will vote next week on rules that may make it easier to oust directors.
• Treasury 10-Year yields near 17-month low as Fed, Japanese investors buy.
• US banks receive Basel III boost, Rewrite of rules could cut in half new capital required.
• AIG sets stage for first bond sale since bailout.
• Applied Materials guides Q4 EPS, revs above consensus.

Way back in the 1960’s analysts were worried about the multi-decade increase of debt. Some focused on personal debt burdens, some looked at corporate gearing, and others feared government deficits, but for years and years these worrywarts were proven wrong, as the economy powered higher and higher making the critics look like idiots. Statistics on almost all types of debt showed a high correlation between their increases and increases in measures of economic health like the GDP, average personal net worth, and the country’s standard of living. Underneath this positive economic view, seemingly out of sight to everyone, a slow weakening was taking place. As the years went on, the dollar increase in debt necessary to generate a dollar increase in GDP kept growing. Back in the late 1940’s and 1950’s, it took about a one dollar increase in debt to generate a one dollar increase in growth, but in each succeeding decade the amount of debt necessary to generate a dollar increase in GDP kept growing. Through the most recent decade, it seems to have taken more than five dollars of debt to produce one dollar of growth, and over the last few years the numbers might have gone into reverse, or perhaps only toward infinity, as all the increase in debt does not seem to create any growth. - John Taylor

RANsquawk European Morning Briefing - Stocks, Bonds, FX etc. – 19/08/10